HONG KONG: Inflation in Hong Kong probably eased to 0.4 percent in May, a four-and-a-half-year low, as increases in food prices and housing rents slowed and the economic recession continued to depress prices of consumer goods, a Reuters survey shows.

While the city is probably heading for a bout of deflation in the coming months, analysts say the cycle could be temporary as rising oil prices are expected to boost the cost of transport and some public services, while retailers gain some room to lift prices amid expectations the economy will pick up next year.

"We might see one or two months' of deflation in the third or fourth quarter, but it will be mild, not serious," said Daniel Chan, senior investment strategist at DBS Bank.

A woman carrying an advertisement for a shopping mall distributes flyers to passers-by in a commercial district in Hong Kong. The recession continues to suppress consumer prices. Bloomberg News

"Food prices remain high and we expect the global economy, and Hong Kong's economy, to start to recover late this year or early in 2010, and that means demand will increase."

Inflation, which stood at 0.6 percent in April, has come down from a peak of 6.5 percent last summer, as increases in housing rents and food prices have slowed sharply and the government has extended temporary waivers on utilities and other services.

Netting out temporary waivers, underlying inflation in April stood at 1.9 percent, down from 5.4 percent a year earlier.

Housing rents are actually lower than a year ago, but they still show up as positive in the consumer price index because tenants typically are locked into two-year lease agreements. In April, the index's housing component rose 5.4 percent, easing from a 5.7 percent increase in March. Food prices in April rose 2.2 percent, down from a 5.4 percent rise in March.

An economic recession, which began in the third quarter of 2008 and has deepened this year, has depressed consumer spending and many shops are now offering heavy discounts to sell stock.

Negligible inflation, and even slight deflation, is therefore seen as positive since consumers do not have to pay more for goods. Prolonged deflation, however, could encourage people to put off spending in anticipation that goods will become even cheaper.

Economists say the economy may be bottoming out even though exports continue to fall sharply.

They see it stabilizing in the second half of this year, although the government forecasts gross domestic product, which fell 7.8 percent in the first quarter from a year earlier, will shrink by up to 6.5 percent for the year as a whole, its worst year since 1998 during the Asian financial crisis.

Reuters

(HK Edition 06/20/2009 page5)